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News : International Last Updated: Dec 19th, 2007 - 13:17:15


Norway's $200 billion oil pension fund bans investments in US retail giant Wal-Mart and mining group because of human rights and environmental violations
By Finfacts Team
Jun 6, 2006, 14:47

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The Norwegian Ministry of Finance has excluded the US retail giant Wal-Mart Stores Inc., Wal-Mart de Mexico (“Wal-Mart”) and Freeport McMoRan Copper and Gold Inc. (“Freeport”) from the Norwegian Government Pension Fund – Global’s investment universe in line with recommendations from the Council on Ethics for the Fund. The recommendation to exclude Wal-Mart cites serious/systematic violations of human rights and labour rights. The recommendation to exclude Freeport is based on serious environmental damage.

Freeport-McMoRan Copper & Gold Inc. (FCX) is the world's lowest-cost copper producer and one of the world's largest producers of copper and gold. FCX's operations are conducted through its subsidiaries, PT Freeport Indonesia, PT Irja Eastern Minerals and Atlantic Copper, S.A. FCX is headquartered in New Orleans, USA. The Council on Ethics finds that the environmental damage caused by the mining operations is extensive, long-term and irreversible. The Council notes that the authorities in many countries and key international players (the World Bank et al.) consider riverine disposal to be an unacceptable method for disposing of mine waste due to its extensive and irreversible environmental effects.

- The Council’s assessments deal with issues under the Ethical Guidelines which have not been dealt with by previous recommendations, such as violations of human rights, labour rights and complicity in serious damage to the environment. The exclusions reflect our refusal to contribute to serious, systematic or gross violations of ethical norms in these areas through our investments in the Government Pension Fund – Global, says Minister of Finance Kristin Halvorsen.

- The Ministry of Finance says that the Council’s recommendations represent a thoroughgoing piece of work which provides a good basis for its consideration of these cases and its resulting decisions.

These companies are excluded because, in view of their practices, investing in them entails an unacceptable risk that the Fund may be complicit in serious, systematic or gross violations of norms, says Minister of Finance Kristin Halvorsen.

Wal-Mart

The Council on Ethics has considered allegations that Wal-Mart is implicit in violations of human rights and labour rights in its business operations. Wal-Mart is the world’s largest retailer, posting a turnover of $285 billion in 2005.

Point 4.4., second paragraph, first bullet point of the Ethical Guidelines, reads:

“The Council shall issue recommendations on the exclusion of one or several companies from the investment universe because of acts or omissions that constitute an unacceptable risk of the Fund contributing to: serious or systematic human rights violations, such as murder, torture, deprivation of liberty, forced labour, the worst forms of child labour and other forms of child exploitation.”

According to the  Council on Ethics’ recommendation of 15 November 2005 “An extensive body of material indicates that Wal-Mart consistently and systematically employs minors in contravention of international rules, that working conditions at many of its suppliers are dangerous or health-hazardous, that workers are pressured into working overtime without compensation, that the company systematically discriminates against women in pay, that all attempts to unionise by the company’s employees are stopped, that employees are in a number of cases unreasonably punished and locked in, along with a number of other circumstances…”

The Council’s assessments encompass Wal-Mart’s business operations in the USA and Canada, and at its suppliers in Nicaragua, El Salvador, Honduras, Lesotho, Kenya, Uganda, Namibia, Malawi, Madagascar, Swaziland, Bangladesh, China and Indonesia.

The Council on Ethics summarises its recommendation as follows: “What makes this case special is the sum total of ethical norm violations, both in the company’s own business operations and in the supplier chain. It appears to be a systematic and planned practice on the part of the company to hover at, or cross, the bounds of what are accepted norms for the work environment. Many of the violations are serious, most appear to be systematic, and altogether they form a picture of a company whose overall activity displays a lack of willingness to countervail violations of norms in its business operations.”

The Council, through Norges Bank (Bank of Norway - the central bank), wrote to Wal-Mart on 14 September 2005 inviting them to comment on the allegations of complicity in violations of human rights and labour rights. Wal-Mart did not respond to this letter.

The Ministry of Finance has dialogued with Norges Bank on the possibilities for exercising ownership rights as an instrument vis-à-vis Wal-Mart. In a letter of 6 January this year Norges Bank wrote that it would like to exercise its ownership rights in Wal-Mart and that this “may help influence Wal-Mart in a positive direction, while at the same time communicating important ethical considerations and principles, not only to Wal-Mart, but to other companies with similar operations, as well as other investors.” Norges Bank also writes that at the present time “… processes are under way in relation to ethical and social conditions at Wal-Mart, and that Norges Bank is in a position to participate in several of these processes.”  At the same time the bank points out that “… exercising ownership rights in a company such as Wal-Mart is a complicated matter and requires patience.”

-"I would emphasise that the exercise of ownership rights is a highly important instrument under the Ethical Guidelines in terms of promoting ethical practices and long-term sustainability,” says Minister of Finance Kristin Halvorsen.

- Exercise of ownership rights is the instrument best suited to influencing companies in a desired direction. For that reason I view Norges Bank’s stance positively. The threshold for excluding companies from the Fund’s investment universe must be high. Companies’ violations of norms must be of a serious, systematic or gross nature in order for this instrument to be applied. However, in this particular case the Council on Ethics is clear in its recommendation for exclusion, and the Council views the risk of complicity in future norm violations as unacceptable.

In light of the Council’s recommendation, the Ministry of Finance finds it unlikely that exercising the Fund’s ownership rights vis-à-vis Wal-Mart will sufficiently reduce the risk of the Fund contributing to ethically unacceptable conduct, as this is defined in the Ethical Guidelines.

In light of the above, the Ministry of Finance has decided to act on the Council’s recommendation to exclude Wal-Mart from the Fund’s investment universe based on the view that the Government Pension Fund – Global will incur an unacceptable risk of contributing to serious or systematic violations of human rights by maintaining its investments in the company.

Freeport

Freeport is a mining company operating one of the world’s largest copper mines in the island of New Guinea in Indonesia. Freeport uses a natural river system for tailings disposal. The Council on Ethics for the Government Pension Fund – Global has considered allegations that Freeport, through its waste management practices is inflicting extensive and serious damage on the environment.

According to Point 4.4., second paragraph, third bullet point of the Ethical Guidelines, the Council on Ethics is required to give “… recommendations on the exclusion of one or several companies from the investment universe because of acts or omissions that constitute an unacceptable risk of the Fund contributing to: … severe environmental damage…”

In its assessment of what is to be regarded as serious environmental damage, the Council on Ethics has considered whether the damage is significant, whether it causes irreversible or long-term impacts, whether it has considerable negative consequences for human life and health, whether it is a result of violations of national laws and international standards, whether the company has neglected to act in order to prevent damage or failed to put in place measures to rectify the damage and whether it is likely that the company’s unacceptable practices will continue.

Freeport employs a natural river system to dispose of close to 230,000 tonnes of tailings each day, thereby releasing large quantities of sediments and heavy metals such as copper, cadmium and mercury into the watercourse. Riverine tailings disposal has inflicted serious damage on the river system and parts of the nearby riverine rainforest and has considerable negative consequences for the indigenous peoples residing in the area.

The Council on Ethics finds that the environmental damage caused by the mining operations is extensive, long-term and irreversible. The Council notes that the authorities in many countries and key international players (the World Bank et al.) consider riverine disposal to be an unacceptable method for disposing of mine waste due to its extensive and irreversible environmental effects. To the Council’s knowledge, Indonesia and Papua New Guinea are the only countries that still allow riverine tailings disposal. While it may not be reasonable to apply Norwegian or Western environmental standards in all situations., the Council considers that lenient legislation in a country does not automatically justify a heavy environmental burden if the damage is considerable.

Freeport gives no indication of intending to alter the way the company manages waste in the future, or of initiating measures that will significantly reduce the damage to the environment, despite the fact that Freeport, in the Council’s view, has long been aware of the environmental damage caused by the company’s practices. On the contrary, the company plans to maintain production volumes in the years to come and maintains that riverine tailings disposal is the best waste management alternative, according to the Council. 

Freeport was invited by letter of 22 December 2005 from Norges Bank to comment on the findings and on the Council’s assessments of these findings. The company replied by letter of 20 January 2006. While Freeport refutes the allegations levelled at the company, it chooses not to provide evidence in support of its position, according to the Council.

Based on an overall assessment, the Council on Ethics concludes that the Government Pension Fund – Global runs an unacceptable risk of contributing to severe environmental damage by investing in the company. Against this background the Ministry of Finance has decided to exclude Freeport from the Fund’s investment universe under the Fund’s Ethical Guidelines.

Disinvestment

According to established procedures Norges Bank has two months in which to disinvest from a company before a decision on exclusion is made public. Norges Bank was asked by letter of 28 March 2006 to disinvest from the above two companies concerned by the end of May 2006. Disposal of stocks and bonds in the companies is now complete. As of 31 December 2005 the Government Pension Fund – Global’s investment in Wal-Mart totalled about NOK 2.5 billion. The Fund’s investment in Freeport came to about NOK 116 million at the same point in time. Publication of the decisions has been deferred to ensure an appropriate disinvestment process.

INFORMATION FROM THE NORWEGIAN GOVERNMENT:

How to Invest $200 Billion ... Ethically

Norway pumps three million barrels of oil from the North Sea daily, and is now the world’s third largest exporter of oil, after Saudi Arabia and Russia. But how can Norway save this wealth for future generations?

3/28/2006 :: The answer: Funneling the revenues into The Norwegian Government Pension Fund. Currently the fund receives attention not only because it is one of the largest retirement funds in the world, but also due to its newly implemented ethical investment guidelines.

Tore Mydske, representing the Norwegian Ministry of Finance, which is responsible for the fund, answers the ethical questions:

WHY DOES THE GOVERNMENT PENSION FUND HAVE A STRONG ETHICAL PROFILE?

The ethical guidelines were adopted by the Norwegian Parliament in 2004, and are based on two premises. First, the fund is an instrument for ensuring that a reasonable portion of the country’s petroleum wealth should benefit future generations.

So it needs to be managed with focus on generating a sound return in the long term. Second, the fund should not through its investments contribute to unethical acts, such as violations of fundamental humanitarian principles, serious violations of human rights, gross corruption, or severe environmental degradation.

HOW ARE THESE ETHICAL CONSIDERATIONS OBSERVED?

The ethical basis for the fund is promoted through three different measures. First, it is done through exercising ownership rights in order to promote long-term financial returns. This is done by Norges Bank (the Norwegian Central Bank). Corporate governance is a keyword here, and the bank exercises its ownership rights and voting power, for instance by fighting corruption or poor leadership within a company.

Secondly, it is done through negative screening – selling the shares in companies that produce weapons which may violate humanitarian principles. The focus here is on the products the company makes, not on how the company is run.

Thirdly, it can be done through exclusion of companies where there may be a risk of contributing to serious or systematic human rights violations, severe environmental degradation, gross corruption, or other particularly serious violations of fundamental ethical norms. The decision to sell shares in a company based on negative screening or exclusion is made by the Ministry of Finance.

WHO DECIDES WHAT IS ETHICAL OR NOT?

The ethical framework is anchored in the guidelines adopted by the Norwegian Parliament – with broad political support. The Ministry of Finance commissioned a Council of Ethics to screen the companies the fund is invested in. The council evaluates whether investing in certain companies is consistent with the Parliament’s ethical guidelines. The council gives its advice to the Ministry of Finance, which makes the final decision on whether to sell or not. If deciding to sell, the stocks are sold off quietly in order to not influence the value of the company, and the Finance Ministry’s decision is made public only after all stocks are sold.

HOW MANY COMPANIES HAVE BEEN EXCLUDED TO DATE AND WHY?

17 firms from around the world have been excluded from the fund. Most of these are involved in production of nuclear weapons or key components for cluster bombs.
 
ARE ETHICAL CONSIDERATIONS MORE IMPORTANT THAN PROFIT?

Often there is no conflict between the two. In terms of corruption, for instance, it is neither ethically nor economically sound to invest in a corrupt company.

WHERE IS THE FUND INVESTED?

To put it simply, the net is cast as widely as possible. We are not interested in risky stocks with short-term gains. This fund is for our children, and for our children’s children, and therefore it is important that we have as low risk as possible. We do this by investing comparatively small sums in a broad array of companies.

This way we follow the larger tendencies in the stock market. A little over half of the fund is invested in bonds and equities in Europe. The rest is spread out over America, Asia, Australia and New Zealand, and South Africa. The fund can hold a maximum of 3 percent of the shares in any company.

WHY ISN’T THE OIL MONEY JUST INVESTED IN NORWAY, SOLVING ALL SOCIAL PROBLEMS?

We want to avoid what is called the Dutch Disease: Historically, nations which have suddenly become very wealthy – particularly from natural resources – have only rarely been able to manage the wealth wisely. This has happened time and time again in the history of the world, and it is therefore absolutely vital for us not to become dependent on – or even addicted to – the wealth the oil has given us.

In the short term, pouring oil money into the Norwegian economy would result in overheating the economy, an inflation spiraling out of control and a large portion of Norwegian industry – the very basis of our current and future economy – would be forced to shut down or outsource.

We also need the money to cover our social security costs in the future. As with most other industrialized countries, we are facing an aging population and vastly increasing costs of pensions. Still, the oil fund will only cover a third of these expenses in the future, so we need to keep the Norwegian economy healthy.

Some oil revenue is already being used today, though. According to a self-imposed “fiscal rule,” the government can use the  real return of the oil fund  to cover the “non-oil” deficit in the national budget. This real return is stipulated to be 4 percent  of the total value of the fund. Still, it is vital that we show temperance and not use too much.

Facts about the Government Pension Fund

• The Government Pension Fund is currently worth more than $196 billion.

• At the end of 2006, the fund is expected to be worth $220 billion. That is approximately $43,000 per Norwegian, up from $1500 per Norwegian in 1996.

• At the current growth rate the Government Pension Fund will be the world’s second largest retirement fund by the end of this year.

• Income from the petroleum sector accounts for 21 per cent of the Norwegian GDP

• 47 percent of Norway’s exports are petroleum related.


© Copyright 2007 by Finfacts.com

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